Q3 2023 Limbach Holdings Inc Earnings Call
Greetings and welcome to the Limbach holdings call to discuss third quarter 2023 results an update on current operations. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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I'd now like to turn the conference over to your host Mr. Jeremy Hellman of the equity group. Thank you you may begin. Thank you very much and good morning, everyone yesterday, Limbach Holdings announced its third quarter 2022 results and filed its Form 10-Q for the period ended September 32023.
The company would also like to note that an updated investor presentation is available on the investors section of the company's website at Www Dot Limbach and dotcom.
Management will refer to slides slides during today's call encourages investors to review the presentation in its entirety.
This call the company will be reviewing its financial results, providing an update on current market conditions. Today's discussion may contain forward looking statements and actual results may differ from any forecast projections or similar statements made during the earnings call this kind of stuff.
I remind you to review the company's annual report on Form 10-K, and quarterly reports on Form 10-K for risk factors that may cause the actual results to differ from forward looking statements made during this call also please note that during the question and answer session at the end of the call. We will only be taking questions from our analysts with that I'll turn the call over to Mike Mccann caused that.
Chief Executive Officer of Limbach Holdings. Please go ahead Mike.
Good morning, welcome everyone and thanks for joining US joining me. This morning is Jayme Brooks, our executive Vice President and Chief Financial Officer.
Turning to the third quarter, we continued to execute on all fronts and the result was continued margin expansion, which in turn led to solid growth in net income adjusted EBITDA and cash flow.
We continue to see our OTR transition happening at a rapid pace, we call that we were originally targeting a 50 50 revenue split by 2025.
As we speak with you today, we appear on track to hit that target this year.
And doing so this change in our business mix is driving the intended growth and gross margins earnings and cash flow.
As indicated in slide 12 in our Investor deck, we're now focused on shifting to a new target of at least 70% OTR.
Both of our segments are performing well.
This shift our sales and marketing resources towards the OTR segment as a margin advantage for OTR segment. During Q3 was 1000 basis points compared with our TCR segment.
Performance of proving our G Star segment is a product of execution.
Good selection, which has been made easier if you will do a rapid shift the OTR and ability to be extraordinarily selective.
Within our G. So you have to take my results for this quarter was the successful resolution of our largest legacy claim.
The claim resolution resulted in a $1.2 million write up net cash did the company up $16 million.
That leaves one less significant legacy claim open.
Beyond the segment shifting in segment margin enhancement objectives, the third pillar of our strategy scale for acquisitions.
You already completed the acquisition of Acme industrial in July.
Pleased to announce that we're able to close another deal this year.
Subsequent to quarter end, we announced the acquisition of industrial Air base in Greensboro, North Carolina for $13 $5 million in cash.
We're very excited to add industrial air to the Limbach family.
We were able to fund that deal with our cash on hand.
Organic business continues to allow us to self fund acquisitions.
Recall that our acquisition program focuses on both tuck in deals as well as larger opportunities a boon believe will allow us to build out our geographic presence.
Just for Air falls into the latter category, providing live up to the new presence in the attractive growing Carolinas market.
As shown on slide 18 of our Investor deck.
Yesterday I hit the Mark in all of our acquisition criteria.
Strategic geographic location strong OTR customer base, including a number of national scale customers.
We believe an incredible opportunity for future value creation.
Industrial Air also has their own line of products, including air handling units that are manufactured in house.
That gives us a decided advantage in being able to propose and deliver value added solutions for customers without continuous supply chain chokepoints.
Industrial are also both the very old yard centric model.
They're really great fit for Limbach, we're very excited to have them aboard.
With the deal closing in November 1st we expect industrial air to have a relatively minimal impact in 2022 revenues.
And EBITDA.
While 2024 should benefit from the inclusion of roughly $30 million of revenue and $4 million of EBITDA.
We are pleased to have built a favorable earn out economics, how do they deal structure, which lowers our cost of capital and provides all parties with a great outcome, if and when targets are met.
I'll now pass it off to Jamie to provide some financial highlights.
And then I'll return with a few comments on market conditions before we take your questions Jamie.
Thanks, Mike our press release and Form 10-Q, which was filed yesterday, both provide extensive details of our financial but I'll focus on some key highlights.
Starting with the income statement during the third quarter. The OTR segment accounted for 51, 5% of total consolidated revenue.
Up from 48, 8% last year in Q3.
OTR revenue during the quarter was up 10, 3% from a year ago, well G. C. Our revenue was essentially flat, resulting in consolidated topline growth is four 4%.
As Mike noted, we continue to see solid execution in the quarter.
Salaries at gross margin during the third quarter benefited from the increasing contribution from our higher margin OTR segment.
The overall margin performance in both segments and a couple of one time benefit that flowed through the GTR segment.
These one time benefits included the settlement of one of our outstanding claims, which resulted in a gross margin benefit of $1 2 million and then we also had another one 2 million gross margin benefit during the quarter as a result of the early completion of the project due to tax and in scope from the customer.
These one time benefits contributed $2 4 million to the higher than usual you see our gross margin of 19, 3%.
Excluding these two items did.
Did you see our gross margin was still solid and exceeded our target range of 12% to 15% and our earlier gross margin stayed strong at 29, 3%, which was similar to Q2.
Consolidated gross margin was 24, 5% for the quarter and even if we read it back out the one time benefit we had very strong performance and record high gross margin.
SG&A expense was 21 million for the quarter or 16, 4% of revenue and was up modestly from $20 4 million in the second quarter and up from $18 7 million in the year ago period.
The increase in SG&A expense was primarily related to one 4 million increase in payroll related expenses.
A $600000 increase in professional fees, including acquisition deal related fees and.
A $300000 increase in stock based compensation expense.
SG&A expense associated with the Acme transaction was approximately $300000.
The purchase date through the end of the quarter.
On prior calls we have noted that we expect full year 2023 SG&A expense as a percentage of total revenue.
Are they similar in your run rate is 2022.
I said, we have seen bottom line growth outpaced our total revenue growth this year.
We projected SG&A expense is expected to land at the higher end of our targeted range of 15, 5% to 16.5% of total revenue for the full year.
Now turning to cash flow.
We continue to have a strong balance sheet at quarter end, our cash and cash equivalents balance was $57 5 million and we had $10 million outstanding on our revolver.
Just a quarter and a net cash position of $35 2 million compared to a net cash position of $23 6 million at the end of June and $4 2 million at the end of December 2022.
Total operating cash flow during the third quarter with $17 2 million compared with $10 4 million a year ago.
Changes in working capital accounts, how do 5.8 million positive impact on operating cash flow this quarter.
The remaining $11 4 million of operating cash flow was the non working capital component.
As we've noted previously our free cash flow from operations can be calculated by taking the non working capital components, and then subtracting capex, which totaled $221000 in the quarter.
That leaves free cash flow at $11 2 million or around 82% of our adjusted EBITDA.
The third quarter did include a couple of noteworthy cash items, starting with the net receipt of approximately $15 6 million from the settlement of a claim is cash receipt was primarily offset by an increase in accounts receivable of $15 2 million.
The changes in working capital mentioned earlier.
We also used cash of $4 9 million in investing activities for the Acme acquisition.
Subsequent to quarter end as Mike noted, we used $13 $5 million of our cash to fund the acquisition of industrial Air, which still leaves us with a solid liquidity position.
I'll now hand, it back to Mike.
Thank you Jamie as we approach year end, we have good momentum.
Executing well on our plan.
Demonstrated success in each of the three growth levers we have identified.
That has allowed us to raise our adjusted EBIT guidance for a second time this year.
Recall, we began the year with a range of $33 million to $37 million and then we subsequently raised that to a range of $38 million to $41 million last quarter. We are now increasing our adjusted EBITDA guidance again for 2023 to a range of 42 to 45 night.
The upward revision to our adjusted EBITDA guidance. This quarter is a function of our continued strong performance year to date.
Along with a small contribution from our two acquisitions during the second half of the year.
During the third quarter, we were once again able to record gross margins above the target range of both segments.
Underpinning that performance through a rigorous project selection excellent field execution and overarching emphasis on delivering value added solutions for our customers.
Our adjusted EBITDA also benefited from two one times you see our gross margin benefits of $2 4 million that were booked in the quarter as Jamie discussed earlier.
We are also reiterating our revenue guidance for 2023, which consists of total revenue for the year in the range of $490 million.
520 billion.
We believe overall conditions in our end markets remain supportive of our services.
Well much of the day to day headlines focused on macroeconomic conditions when that continues to see strong demand due to the mission critical nature of our end markets.
That's going to continue our evolution of being an indispensable partner to building owners.
Our key customers continue to show that our services are essential and the spend is resilient.
Leading customers in our target verticals have been successful in managing their operations and balance sheet.
As of now we've not seen interest rates make a significant dent demand as a reminder, with our OTR expansion of our business is less correlated with new construction and in the past.
Over the past quarter, all vertical markets experienced strong demand.
As an example, the last quarter, we saw health care spend from both a operational repair budget and long term capital projects.
In our industrial manufacturing vertical market customers were focused on preparing for future capacity and there appears to be no shortage of opportunity.
Also as a reminder, we spent a lot of time refining our model to be flexible and adaptive to a variety of market conditions.
Central that is our focus on customers with mission critical facilities.
By providing high value solutions to those customers, we expect to be well positioned to serve their needs regardless of the prevailing economic wins.
Focusing on supply chain for a moment.
We do see some moderation of equipment lead times for off the shelf items at the same time conflict complex equipment is still difficult to obtain with delivery times remaining elevated so again one of the many reasons, we're very enthusiastic about the acquisition of industrial air.
Heading into year end, we believe we have good momentum and look forward to closing the year strong.
As we head into 2024, we look forward to having Acme and industrial air provide full year contributions to our results and helped propel our continued effort to maximizing our overall Oh D our opportunities.
Based on our current views and expectations, we don't want to underestimate what we believe is a large market opportunity that we continue to pursue.
We continue to believe that we have the right platform the right people and the right strategy to continue to drive strong operating results.
I also want to remind everyone that slide 27 of our Investor presentation includes additional modern modeling considerations with that operator, please open the Q&A session.
Thank you.
At this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Rob Brown with Lake Street Capital markets. Please proceed with your question.
Oh, good morning, and congratulations on all the progress.
Thanks, Rob good morning.
You talked about you know a lot of detail about the margins in some of the ins and outs in the quarter, but your long term margin targets are they you know you've been running ahead of them are you now have you seen some structural improvements there that maybe you can continue to do that or you know how do you think about long term margin targets.
Into next year.
You know Robert you know regarding each one of those we get we're definitely optimistic.
That there there is gonna be future improvement, but at the same time, we continue to make sure that we have the right trend line going forward before we do anything from a range perspective, just to talk about each one of them really quick G. C. R.
I mentioned this in the prepared remarks, but a lot of this has to do with our ability to be extraordinarily selective right now there's tremendous amount of work it could be filling up our backlog, but since we are very strategically increasing O D R and reducing G. C. R. That's allowed us to be very opportunistic from margin perspective.
From the owner direct perspective.
Still lots of opportunity and I can tell you our main focus from a go to market perspective is.
You know to make sure that our our the work that we get is a combination of both relationship and value add we've had a lot of conversations with customers recently, they're very appreciative of the work that we're doing and the dedication we are to a select group of accounts.
We've been really working collaboratively with certain customers to make sure that we're really honored.
Making sure they understand our value working collaboratively with them and in overtime. We believe that's going to be an opportunity from our additional margin expansion, but it's really a process that we've gone through so just to summarize GTR is really a product of being extraordinarily selective.
And owner direct is is just making is there's future opportunity, but it's a matter of us really making sure that we prove our value in continuing to expand our services.
Okay, great. Thank you and then it's really on the market and demand environment I know you're focused on some high growth verticals.
But how do you see the demand environment kind of continuing or are you seeing any serious sort of weakness or is it a I mean.
Remain in terms of quoting activity I guess remain.
Yes.
You know I think one of the one of the key things that our strategy is making sure that and we've really been positioning ourselves right. In the last couple of years is really to make sure that we have the right mission critical markets, where in customers, where they can't afford not to have service done.
Just to touch upon the Q at a few of them health care Health care has been really really positive for us this year.
It's been an interesting ride with them going from 2020 into the last few years, but we dedicate ourselves to those accounts and we're starting to look ahead to future capital budgets going into 2024 and 25 at the same time, there's tremendous amounts of repair work that needs to happen some of that student to deferred maintenance, so really looking optimistic.
That.
The industrial manufacturing has been really strong this year those are due to you know whether it's a line change or it's again deferred maintenance. So I I think in summary.
We're really looking forward to the fact that we're dedicating ourselves to mission critical vertical markets that demand means remains resilient and we're very optimistic about that.
Great Okay. Good.
And then and then on the industrial Air fare acquisition looks like a pretty interesting situation.
How how you know can you use this component manufacturing ability. They have can you use that in other areas of your business or just maybe a sense of how that adds to what youre doing.
Yeah. So just just in kind of summary, you know we we have a criteria for these acquisitions that we've really learned from from both the Acme industrial and Jake Marcia will continue to learn through the whole process. So I'm really excited that industrial air really checked all those boxes.
One of the pieces that was really interesting when we started that you're really looking to them to get to know them. Once they have a product line.
Air handlers dust filters, all sorts of products.
Did they use currently with their own with their owners and the work that they do they're able to essentially provide a design build solution, where they designed it around their manufactured installed products and we're able to provide a complete end to end. We do think there's an opportunity in I E. Both from a customer perspective, because they have some national customers and I think also.
So from a product perspective to feed our other locations and strategic point so.
Again, we view that as future value add the deal itself.
That was just a strong upon at the meeting criteria, but there's definitely a future opportunity.
Okay, great. Thank you I'll turn it over.
Thank you. Our next question comes from the line of Gerry Sweeney with Roth I'm Kam. Please proceed with your question.
Good morning, Mike Jamie Thanks for taking my call.
Good morning, Jerry.
Just to follow up a little bit.
I was talking about on the OTR side at my senses.
Yeah.
My sense is you're probably still pretty early in this expansion and and I just want to see.
If you could maybe discuss you know maybe the playing field a little bit the opportunities are we still really in the early innings and how you continue to drive this forward.
Yeah, No I agree with you completely I think what you said is that we're still very much in the early innings.
Yeah.
The key thing with our strategy. The last 18 months is to be extraordinarily selective were selective in the GCI side, but on the owner direct side, we're being selective because we're focusing on each location is focusing on their top five accounts.
75, or 80% of their time, and that's really led us to getting some different insights from these building owners. So one thing that we've it's been fairly consistent as they want us to do more.
At the same time, they want us to prove our value along the way.
I think kind of as we go into the next phase and we get into 'twenty, four and 'twenty five whereas at a point now where rebuild competency entrust, we're starting to get a peek into their budget and their needs of their business long term.
And it really co authoring and developing long term solution. So one thing we hear time and time again is the other providers I don't they don't have the same strategy for saying, they're not dedicating themselves as much as we are and.
They like the availability of our people the next stages.
How can we develop a two 510 year program with them really working tightly with their budget understanding their business needs beyond HVA seemed mechanical and electrical.
And building that long term plan, which is going to give to us additional visibility at the same time they were looking for visibility on their budget as well too.
Got it that essentially so you're really trying to get in there and make a sticky relationship.
You said top B look in each location top five customers.
Overtime I would assume I mean, you've got a balance sort of building out that two 510 year relationship that you talked about versus maybe even going after accounts six through 10 is that a way of looking at it as well or is there more than enough currently for your top five customers.
Theres definitely more than enough I would tell you that you know we were at 75% on the top five and there's still 25% that's probably on the next you know 510 15, so there's plenty of diversity in there but.
But I would tell you that to your point.
Just you know the top five has been so demanding they want us to do so many more things that we just continue to our strategy I think resonates with building owners. They understand that there's you know there's a race right now for talent.
And they need to work with us to ensure that they're getting the same person that shows up every day, whether that's from a management or a field perspective, and I think what's nice too from a diversity perspective.
As we talk as we add in I E. They have a whole different group of customers, they're really textile manufacturing type customers.
So it's another top five or 10, so we have each location as a top five or 10 theres going to be some synergy with branch to branch location location and then as we add every acquisition on were adding continue to customer. So the customer list continues to build we're always trying to force ourselves to be as disciplined as possible to make sure that we're providing the best service to those customers.
Got it.
So summarize my words your top five I'm, just making up a number I mean you.
We're looking at it Youre, probably who knows 25, 30, 40% penetration and theirs.
That extra runway just to grow internally or.
With this further with those top five.
Yeah, the that that generally makes sense, yes.
Got it.
Switching gears to G. C are obviously very good margins in the last couple of years have been less is more being very selective you know how much of that is.
That activity are you seeing better price lower project size, maybe just underwriting you're you're.
Your your projects to a higher degree I'm just curious if you could bucket that out.
And yeah, a follow up to that is there opportunity for actually some incremental growth going forward because it sounded as though there's a ton of projects out there. So a lot there so I apologize.
Sure Yeah. So the margin there's a number of different things, which is driving the margin the first one.
It's really our ability to be selective is really driven by the fact that we're driving sales and marketing resources towards owner drags a little come to us and ask US can you really do this one I think the second thing is we're very careful from a risk perspective right now on the CCR projects really looking at size and duration as well as.
The amount of labor that we're actually installing on those projects. So there's definitely a very rigorous and continues to be more rigorous.
Those are really two and then the third thing is our teams are performing really well, we got a great group of teams and what's nice about the staff as they've been able to really flex between owner direct and in D. C. Our work and that's that flexibility has been absolutely Paramount to this this shift happening in nicotine shifts. So those are probably the three big.
Pieces of it from a growth perspective, we still look at it that.
You know, even though its 12 to 15 and maybe in certain quarters, we performed better than 15.
The owner direct still provides almost double the margin and that's what we're going to continue to push towards and just because we're 25 to 28 doesn't believe that theres still a future opportunity beyond that so we're going to continue to push towards owner direct I think you know our next target is really getting to that 70%.
And it just time and time again is the.
It looks like the right return on people and investment to make sure they're going to that higher margin segment.
Gotcha that makes sense and one more then I'll jump back in line, it's just some sort of follow ups.
You talked about MTR G. C R guys being able to flex back and forth is that workforce, 100% sort of fungible between those two businesses or is there a certain percentage that we're always sort of being G C or G. C I'll always be a component.
Of revenue.
You know I look at it where we have our definitions of our segments from a revenue perspective, but from the people side of it.
You know again it goes down to it comes down to our people I think sometimes it's perceived that in the industry that there are certain people that do this work and certain people that do this work, but we found that our our staff has been completely adaptable and flexible.
And that's allowed you know somebody who has worked in the large project the ability to be working at a facility every day as you know an account manager.
So it's been a big shift its a big evolution.
But you know we have great people that are really looking to provide value to customers and and that the ability to flex has been you know paramount.
Got it.
Super helpful. I appreciate it thank you.
Thank you Jerry.
Thank you that concludes our question and answer session I will turn the floor back to management for any final comments.
Thank you everyone for your continued interest in limbach.
You have any additional questions. Please reach out to Jeremy Hellman of the equity group. Thank you everyone have a great day.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.